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Nordic banks face losses on lending to Latvia under government proposals to limit the amount that lenders can collect from defaulting mortgage holders. The plans could lessen the pain of devaluation. The Latvian government led by Valdis Dombrovskis, prime minister, confirmed on Tuesday that it was drafting legislation that would cap the amount banks could collect to the current value of properties rather than the value of the loan. This would trigger big losses for banks such as Swedbank, SEB and Nordea, which dominate the Latvian market, because property prices have fallen 70 per cent. The move comes as Latvia’s government struggles to agree deep budget cuts needed to keep its €7.5bn ($11bn, £7bn) international rescue package on track, amid signs that some donors are losing patience with the Baltic country. In addition to limiting loan collections, the proposals would prevent banks evicting homeowners unless lenders helped them secure an alternative residence. Analysts said the measures would make it easier for Latvia to devalue its currency, the lat, by removing the risk that holders of foreign currency loans would be faced with sharply increased debts. Latvia has repeatedly insisted that it has no plans to break a peg with the euro in spite of speculation that it could try to export its way to recovery by devaluing the lat. The Latvian finance ministry did not return calls for comment on Tuesday. But Einars Repse, the finance minister, said at an International Monetary Fund meeting in Istanbul that high deficits and wages rather than the exchange rate were to blame for Latvia’s problems. He told Reuters news agency: “We will fulfil and we have to fulfil our agreement with the IMF.” Economists said devaluation by Latvia could force neighbouring Lithuania and Estonia to follow suit and possibly trigger contagion in other troubled eastern European economies. Danske Bank analysts said the proposed legislation would leave lenders “in a very bad position” and make it tempting for mortgage holders with negative equity to halt repayments. But they said the move could be a bargaining chip in the government’s negotiations with the IMF and European donors. “Everything might be solved overnight if a compromise can be reached, but the risk premium on Latvian banking business is sky-rocketing at the moment,” said the Danske report. Latvia’s government is balancing pressure from the IMF for budget cuts against growing public and political resistance to the austerity measures, before elections next year. It announced at the weekend that it would cut its budget deficit by just 225m lats next year – half the amount agreed as part of its IMF-led rescue. Fredrik Reinfeldt, Swedish prime minister, stepped up pressure on Tuesday on Riga. “We are expected to honour our undertaking and so they have to honour theirs,” he said. Copyright The Financial Times Limited 2009. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web. www.ft.com
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